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Ron Bostwick (Bostwick), petitioner’s certified public
accountant, met with the board of directors annually to explain
the yearend financial statements, and he routinely advised
petitioner in determining its working capital needs. Bostwick
stressed to the board the need to hold sufficient capital
reserves to fund the contingent stock repurchases from
nonparticipating stockholders when the board met on February 2,
1993; February 24, 1995; March 8, 1996; March 4, 1997; and
February 28, 1998. Bostwick also advised petitioner that it
should provide funding for the redemption of stock from its
working capital and that it should not look to current earnings.
At the December 8, 1995, board meeting, the board decided that
adequate funds were necessary to its future stability.
Class Action Lawsuit
In January 1994, petitioner was sued as part of a class
action lawsuit concerning credit life insurance purchased by some
of its customers. Petitioner carried a commercial insurance
policy and an umbrella insurance policy, but neither provided
coverage for the conduct alleged in the lawsuit.
The potential liability exposure of the class action lawsuit
was unknown to petitioner for several reasons. First,
petitioner’s insurance company refused to defend and indemnify
petitioner. Second, damages were not quantified by plaintiffs.
Third, petitioner could be liable for actual damages, treble
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